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The 1.3% downside move in the ASX 200 has certainly been noticed, especially after Friday’s strength, although nearly 60% of all new positions from clients today have been on the long side. It really throws up the idea that Friday was nothing more than portfolio managers re-weighting and increasing allocations at month-end towards Australian equities given the level of underperformance. The $10 billion in volume would testify to that; nearly double the year’s average and the highest since 22 December.

With this in mind and with a poor lead from Wall Street providing local investors with a negative base from which to work, the fact we didn’t see a bounce from the open speaks volumes, although the technical picture on the daily chart is hardly bearish at this stage.

Data in Australia has been mixed with May house prices (as measured by RPData-Rismark) falling 0.9% in May, although it’s worth pointing out that May is a seasonally weak month. Q1 company operating profits (+ 0.2% vs 0.0% expected) and inventories (+0.4% vs +0.1%) were above consensus and should bolster expectations for Wednesdays Q1 GDP, which will be weighed down by last week’s CAPEX data. April Building approvals fell 4.4% on the month, but haven’t really provided any major moves in market.

Buyers have been prevalent in the AUD and I personally would be looking at higher levels to sell into the pair – consolidation in the short-term seems likely. On the daily chart the trend is lower and this should be respected, with downtrend resistance drawn from the May high coming in around $0.7685. A break of this level could see a move into the 38.2% retracement of the May sell-off at $0.7827, but I personally feel this represents a good level from which to re-apply shorts. Tomorrow’s Reserve Bank meeting isn’t likely to reveal any major new news and this may disappoint to a degree given the poor capital spending intension revealed last week. The bank’s view on the currency (i.e. ‘the currency depreciation seems both likely and necessary’) is unlikely to change materially given iron ore prices are up 7% from the prior meeting and inflation expectations have been rising globally as a result of higher energy prices.

The trade-weighted AUD has fallen 0.9% since the prior meeting, although the falls have been more aggressive against the Greenback. It’s hard to think then given these dynamics that we get a change to their view on the currency. Once again the AUD/USD remains shackled to the spread in the bond market, specifically the premium the Australian two-year treasury holds over the US treasury.

China is seeing strong buying today and after a sizeable equity liquidation on Thursday, stabilisation on Friday we have seen the bulls return. As detailed in prior reports the level of retail participation in the Chi-Next (small cap index) is the highest of the Chinese markets at 75%, so this should be the leading indicator for China; this index is up 4% today. Naturally, there are real risks with holding exposure to a bull case in China, especially when local brokers are increasing the barriers for retail traders to access margin financing in the equity market. Perhaps one of the more interesting headlines I have seen is the potential to double the local government’s debt swap program. The current program is working quite well and a number of provinces have been able to roll debt maturing this year into longer term debt (at lower interest rates), which should in theory help save many local governments billions. It should also facilitate greater funding for fiscal projects and is one of the inputs as to why growth should trough in Q2.

Today’s China May manufacturing print at 50.2 was probably the goldilocks number, in so much as it showed improvement but it’s not too hot so as to subtract from further easing measures. Encouragingly, the new orders sub-component grew at a faster pace at 50.6.

Japan has finally succumbed to profit taking after 11 days of gains. However, good buying has been seen off the day’s low and remains one of the more attractive markets in the world right now. US futures haven’t really followed Japan though and have found modest buyers and our European equity market calls seem to be fairly constructive at this stage.

Judging by the early selling in EUR/USD (low of $1.0930), it seems Greece is now playing a more prominent role in market pricing, although this seems more confined to the EUR and most probably Greek and peripheral bond markets. There has been much press over the last 12 hours from various key players in the negotiations but nothing that fills me with any immediate hope that the creditor nations are going to hand over €7.2 billion so that Greece can meet its various obligations through to August.

The increasingly likely scenario is that Greece will look to package or bundle the four debt obligations to the IMF into one, which is a rule conjured up in the 1970’s and utilised once in the 80’s by Libya. This should buy them a few more weeks and from here a referendum on any agreement could come to fruition. The painful thing for markets though is even if Greece are handed the €7.2 billion tranche this only keeps them liquid until August. We haven’t even started hearing negotiations or even press coverage of a third bailout but this would be the next stage. So, for anyone hoping for an easy solution, think again; plenty more ink will be spilt on Greece.

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